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Fitch Assigns VEON's Proposed Notes 'BB+(EXP)'; Affirms IDR
May 30, 2017 / 10:15 AM / 6 months ago

Fitch Assigns VEON's Proposed Notes 'BB+(EXP)'; Affirms IDR

(The following statement was released by the rating agency) MOSCOW/LONDON, May 30 (Fitch) Fitch Ratings has affirmed VEON Ltd's Long-Term IDR at 'BB+' with a Stable Outlook. Fitch has also affirmed its senior unsecured debt rating at 'BB+', including debt issued and guaranteed by its subsidiaries and intermediary holding companies. We have assigned an expected rating of 'BB+(EXP)' to the prospective issue of senior unsecured notes by VEON's subsidiary, VimpelCom Holdings B.V. The final rating of the prospective notes is contingent upon the receipt of final documentation confirming materially to the preliminary documentation reviewed. A full list of rating actions is at the end of this commentary. VimpelCom Holdings B.V. intends to issue USD-denominated senior unsecured notes. The notes are expected to be of benchmark size with a short-to-intermediate tenor. The notes' documentation includes provisions for negative pledge and cross default of VEON's significant subsidiaries. The proceeds from the transaction will be used to finance the tender offer for existing senior unsecured bonds at PJSC Vimpelcom due 2018 and 2021 and at VimpelCom Holdings B.V. due 2022. The deal would allow VEON to reduce the amount of guaranteed debt and Fitch views it as moderately positive for the ratings. KEY RATING DRIVERS No PJSC Structural Subordination: We rate VEON's parent company debt at the same level as debt issued or guaranteed by PJSC VimpelCom (PJSC), the operating company in Russia and the rest of the CIS. This is because the amount of prior-ranking debt at PJSC, the strongest operating entity within the VEON group, should remain below 2x of the group's EBITDA and VEON intends to discontinue relying on PJSC's guarantees for issuing debt at the holding company. The abovementioned refinancing deal supports our view that the amount of prior-ranking debt guaranteed or directly issued by PJSC will decline over the next few years. Stabilising Financial Performance: We expect VEON to continue generating stable revenue and EBITDA in its core markets, which will enable it to gradually reduce leverage. Pressures in Algeria may continue, but as Algeria is deconsolidated under Fitch's approach (see below), this would have a less negative impact on Fitch-defined leverage. VEON has managed to largely stabilise its financial performance, with organic service revenue growth of 0.5% yoy in 2016, and 2.3% yoy without Algeria. This is a gradual improvement from -0.2% yoy in 2015 and -1.5% yoy in 2014. Strong Russian Operations: We expect VEON to remain a strong mobile player in Russia. The company is the third-largest mobile telecoms operator in the country with above 20% market shares by service revenue and subscribers. We believe Russian competition is likely to become more rational. LLC T2 RTK Holding (B+/Negative), the smallest and most aggressive operator so far, has announced plans to discontinue its strategy of being a heavy price discounter, having established a presence in Moscow, the largest and most lucrative regional market in Russia. Less price competition and a gradually recovering macroeconomic situation in Russia are likely to bring in revenue and EBITDA margin stabilisation, in our view. VEON's cash-flow generation in the country is likely to benefit from the company's active involvement in network sharing with other mobile operators in Russia. Substantial FX Mismatch: More than 70% of debt is USD-denominated and all cash flows are in local currencies. VEON consequently faces a significant FX mismatch. It is planning to address this by rebalancing its mix of debt with more funding in local currencies. A lower FX mismatch could lead to a modest relaxation of our leverage rating sensitivities. Limited Leverage Headroom: VEON's leverage is close to its downgrade threshold, and remains sensitive to any weakening of its operating currencies. The rouble strengthened throughout 2016 (and so far in 2017), helping to reduce leverage below our threshold for a downgrade. Fitch-defined net debt/EBITDA was 2.2x at end-2016, with Algerian operations deconsolidated and excluding USD719 million of restricted cash in Uzbekistan, and we expect this to reach 2.0x at the end of 2018. Deleveraging is likely to be slow over the next few years with a resumption of meaningful dividends with approximately USD400 million paid annually, and the announced share buy-back at GTH. VEON's access to the cash flows of its Algerian subsidiary (46% owned by GTH) and its unconsolidated 50/50 JV with CK Hutchison in Italy is limited. We therefore deconsolidate the results of Algerian operations from the group's total, with only regular dividends from Algeria and Italy treated as sustainable cash flows to the group. Corporate Governance, Country Risk: Consistent with other companies that have significant operations in Russia, we notch down VEON's rating by two notches relative to international peers. This notching factors in the Russian business and jurisdictional environment, ownership concentration and VEON's corporate governance policies, procedures and track record. VEON is listed on NASDAQ and on Euronext Amsterdam. LetterOne, VEON's largest shareholder with a 56% economic interest and a 48% voting stake, is a private Luxembourg-based investment company whose chairman and principal shareholder is Mr Mikhail Fridman. DERIVATION SUMMARY VEON benefits from established market positions across its operating franchise. In Russia, VEON's largest market, it is the third-placed mobile operator. Geographical diversification provides a limited benefit as VEON operates in various countries which have low sovereign ratings. VEON faces a higher FX mismatch between debt and cash flow than its similarly rated peers, which makes its leverage more sensitive to exchange-rate volatility and leads us to establish tighter leverage rating sensitivities. The rating incorporates a two-notch discount for the Russian operating environment and corporate governance risks, which is usual for companies which have significant operations in Russia. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for VEON include the following: - flat to low single-digit revenue growth in Russia with a stable EBITDA margin of slightly below 40% in 2017-2020; - mid- to high single-digit revenue growth in Pakistan, Bangladesh and Ukraine in 2017-2020; - stable group EBITDA margin of around 40% in 2017-2020; - capex at above 17% of revenues in 2017 and gradually declining in 2018-2020; - stable dividends of slightly above USD60 million from Algeria, no dividends from Wind in the medium term; - annual dividends modestly growing from USD400 million per year announced in February 2017; - constant FX rates as of end-2016. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include: - a record of strong corporate governance structures and practices which negate the potential negative influence of the dominant shareholder; - a significant improvement in the macroeconomic operating environment, accompanied by sovereign ratings upgrades, leading to sustainably more robust free cash-flow generation. Future developments that may, individually or collectively, lead to negative rating action include: - hindrances to cash-flow circulation across the key subsidiaries, most importantly in Russia;. - significant operating pressures leading to lower cash-flow generation; - a sustained rise in Fitch-defined net debt/EBITDA to above 2.2x, with Algerian operations deconsolidated but reflecting regular dividends from Algeria and Italy in EBITDA. LIQUIDITY Healthy Liquidity: VEON's liquidity is strong, with USD1.9 billion of unrestricted cash and equivalents on balance sheet at end-1Q17 (with USD698 million of restricted cash and deposits in Uzbekistan and Ukraine excluded). This is further supported by a multi-currency term-loan and RCF (the latter maturing in February 2020) for up to USD2.25 billion. FULL LIST OF RATING ACTIONS VEON Ltd Long-Term Issuer Default Rating: affirmed at 'BB+', Outlook Stable Senior unsecured debt: affirmed at 'BB+' VimpelCom Amsterdam B.V. Senior unsecured debt: affirmed at 'BB+' VimpelCom Holdings B.V. Senior unsecured debt: affirmed at 'BB+' Senior unsecured notes: assigned 'BB+(EXP) PJSC VimpelCom Senior unsecured debt: affirmed at 'BB+' GTH Finance B.V. Senior unsecured debt guaranteed by VimpelCom Holdings B.V.: affirmed at 'BB+' Contact: Principal Analyst Slava Bunkov Director +7 495 956 9931 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26, Valovaya Street Moscow 115054 Committee Chairperson Stuart Reid Senior Director +44 20 3530 1089 Summary of Financial Statement Adjustments - Algerian operations are deconsolidated with regular dividends from Algeria and Italy included in EBITDA-based leverage metrics. Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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